Housing's Future: Regulation or Monetary Policy?

Nothing better than jumping into work after vacation and settling right into an argument over what works better to prevent housing bubbles: Regulation or monetary policy?

CNBC

Ben Bernanke

It all started with Fed Chairman Ben Bernanke, and his conclusion in a speech made at the annual meeting of the American Economic Association in Atlanta yesterday.

He had been all about regulation in the speech, but then finished with:

That said, having experienced the damage that asset price bubbles can cause, we must be especially vigilant in ensuring that the recent experiences are not repeated. All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs. However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach. Clearly, we still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era. Maintaining flexibility and an open mind will be essential for successful policymaking as we feel our way forward.

Clearly the housing boom of the past decade was fueled far more by faulty mortgage products than low interest rates, and to find proof of that you need look no further than the government's own mortgage bailout. The Home Affordable Modification Program is trying desperately to keep these faulty mortgages alive by changing their interest rates, but many many borrowers are unable to meet even the lower monthly payments. The underwriting, the lending, the products themselves are simply irreparable.

And we're about to find out how monetary policy affects the housing market, as the Fed winds up its $1.25 trillion program to buy Fannie and Freddie securities, thereby artificially keeping interest rates low by keeping demand high. The Fed claims its on track to pull out March 31st, as planned. Add that to current shenanigans in the bond market which are pushing mortgage interest rates up already, and you'll get that monetary policy whether you like it or not.

What's interesting in all of this is that the action in the housing market right now is cash-only buyers/investors. They're sidestepping the mortgage market entirely. But as I said, these are investors, by and large, and not real organic home buyers. The housing market, while it may have become a commodities market over the past decade, is inherently not one and therefore cannot recover with investors alone.